Transcript Financial Accounting

Faculty: Ms. Luvnica Rastogi
Amity International Business School
Imp Website: www.investorwords.com
To understand the meaning of accounting
To understand the scope and objectives of
financial accounting
To know about the branches of accounting
To understand the importance and limitations
of financial accounting
To know more about the users of accounting
information
To know the basic accounting principles
To understand the recording of transactions
To know what are the advantages of journal
To learn about the classification of accounts and its
rules
To learn about compound entries
To learn about opening and closing entries
To understand the term ledger
To know how to do ledger postings
To understand the rules of posting
To know the meaning of trial balance
To learn more about trial balance
To understand the objectives of preparing trial balance
To learn how errors are disclosed by trial balance
To learn how errors are not disclosed by trial balance
To learn about the methods of allocating errors in a trial
balance
To understand the meaning of capital expenditure
To understand the meaning of revenue expenditure
To understand the meaning of profit and loss account
To understand the method of preparing the profit and loss
account
To understand the meaning of balance sheet
To know the method of preparing a balance
sheet
To know the difference between profit and
loss account and balance sheet
To know the relationship between profit
and loss account and balance sheet
To know how to make various adjustments
in trial balance
Accounting is the language of the
business, the basic function of which is to
serve as a means of communication. If you
ask to whom does it communicate the
results of business operations, the various
interested parties are owners, creditors,
investors, governments and other
agencies .
The definition given by the American Institute
of Certified Public Accountants clearly brings
out the meaning and functions of accounting.
According to it, accounting is “the art of
recording, classifying and summarizing in a
significant manner and in terms of money,
transactions and events which are, in part at
least, of a financial character and interpreting
the result thereof.”
Accounting is an Art
Accounting classifies as an art as it helps in
attaining the goal of ascertaining the
financial results. Analysis and interpretation
of the financial data is the art of accounting,
requiring special knowledge, experience and
judgment.
Involves Recording, Classifying and Summarizing
Recording means systematically writing down the
transactions and events in account books soon after
their occurrence. Classifying is the process of grouping
transactions or entries of similar nature at a place. This
is done by opening accounts in a book called ledger.
Summarizing involves the preparation of reports and
statements from the classified data (ledger),
understandable and useful to management and other
interested parties. This involves preparation of final
accounts.
Records Transaction in Terms of Money
Recording business transaction in
terms of money is the common
measure of recording and helps in
better understanding of the state of
affairs of the business.
Deals with Financial Transactions
Accounting records only those
transactions and events which are of
financial character. If a transaction has
no financial character, it will not be
measured in terms of money and
hence will not be recorded.
Interpretation
Interpretation is the art of
interpreting the results of operations
to determine the financial position of
an enterprise, the progress it has
made and how well it is getting along.
Accounting involves Communication
The results of analysis and
interpretation are communicated to
management and to other interested
parties
Keeping accounts is not the primary objective of a
person or an entity. On the contrary, the primary
objective is to take decision on the basis of the financial
facts given by the accounting statements. Thus, the
understanding of accounts is not the basic objective. It
only helps to realize a specific objective. As such,
accounting is not an end in itself but a means to an end.
Provides necessary information about the financial
activities to the interested parties
• Provides necessary information about the efficiency or
otherwise of management with regard to the proper
utilization of scarce resources
• Provides necessary information for making predictions
(financial forecasting)
• Facilitates to evaluate the earning capacity of a firm by
supplying the statement of financial position, the
statement of periodical earning, together with the
statement of financial activities to various interested
parties
•
Facilitates in decision-making with regard to the
changes in the manner of acquisition, utilization,
preservation and distribution of scarce resources
• Facilitates in decision-making with regard to the
replacement of fixed assets and expansion of the firm
• Provides necessary data to the government to enable it
to take proper decisions concerning to duties, taxes, price
control etc.
• Devices remedial measures for the deviations of the
actual from the budgeted performance
 Provides necessary data and information to managers
for internal reporting and formulation of overall policies
•
Financial Accounting
Accounting deals with recording, classifying and
summarizing the business events that have already
occurred. It is, therefore, historical in nature. That is
why it is called historical accounting or post-mortem
accounting or more popularly financial accounting. Its
aim is to collate the information about income and
financial position on the basis of business events that
have taken place during a particular period of time.
Cost Accounting
Cost accounting deals with the detailed
study of cost pertaining to cost
ascertainment, cost reduction and cost
control. The emphasis is on historical costs as
well as future decision-making costs.
Management
Accounting
Management accounting provides information to
management not only about cost but also about
revenue, profits, investments etc. to enable managers
to discharge their duties more efficiently and
effectively. Thus, it provides required database to
managers to plan and control the activities of
business.
Social Responsibility
Accounting
Social responsibility accounting involves
accounting of social costs incurred by an
enterprise and reporting of social benefits
created by it.
(1) Owner(s)
Owner(s) refers to a person or a group of persons who has
provided capital for running the business. It refers to an
individual in case of proprietor, partners in case of partnership
firm and shareholders in case of a joint stock company. The
information needs of shareholders have assumed a greater
significance in the corporate business world because of the
separation of ownership and management in the case of joint
stock companies.
(2)Managers
For managing business profitably, management requires
adequate information about financial results and financial
position. By providing this information, accounting helps
managers in efficient and smooth running of the business.
(3). Investors
Prospective investors would be keen to know about the past
performance of business before making investment in that
concern. By analyzing historical information provided by
accounting records, they can arrive at a decision about the
expected return and the risk involved in investing in a
particular business.
(4). Creditors and Financial Institutions
Whosoever is extending credit or loan to a business
enterprise would like to have information about its repaying
capacity, credit worthiness etc. Analyzing and interpreting the
financial statements of an enterprise can help in obtaining the
required information.
(5). Employees
Employees are concerned about job security and future
prospects. Both of these are intimately related with the
performance of business. Thus, by analyzing the financial
statements, they can draw conclusions about their job security
and future prospects.
(6). Government
Government policies relating to taxation, providing subsidies
etc. are guided by the relevance of industries in the economic
development of the country. The policies also consider the
past performance of industries. Information about past
performance is provided by the accounting system. Collection
of taxes is also based on accounting records.
(7).Researchers
Researchers need financial information for testing
hypothesis and development of theories and models. The
required information is provided by accounting system.
(8). Customers
The customers who have developed loyalties toward a
business are those who are certainly interested in the
continuance of the business. They certainly want to know
about the future directions of the enterprise with which they
are associating themselves. The way to information about the
enterprise is through their financial statements.
(9).Public
Public at large is always interested in knowing the future
directions of an enterprise and the only window to peep inside
an enterprise is through their financial statements.
1.
Facilitates to Replace Memory
Accounting facilitates to replace human memory by
maintaining a complete record of financial transactions. Human
memory is limited by its very nature. Accounting helps to
overcome this limitation.
2. Facilitates to Comply with Legal Requirements
3. Facilitates to Ascertain Net Result of Operations
4. Facilitates to Ascertain Financial Position
5.Facilitates the Users to take Decisions
6. Facilitates a Comparative Study
7. Assist Management
8. Facilitates Control over Assets
9. Facilitates the Settlement of Tax Liability
10. Facilitates the Ascertainment of Value of Business
11. Facilitates Raising Loans
1. CAPITAL
2. ASSETS
Capital generally refers to
the amount invested in an
enterprise by its owners. For
example, paid up share
capital
in
a
corporate
enterprise. Capital also refers
to the interest of owners in
the assets of an enterprise.
Assets refer to the tangible
objects or intangible rights
owned by an enterprise and
carrying probable future
benefits.
3. LIABILITY
4. REVENUE
Liability is the financial
obligation of an enterprise
other than owners’ funds.


Revenue is the gross inflow
of cash, receivables or other
considerations arising in the
course of ordinary activities
of an enterprise’s resources
yielding interest, royalties
and dividends.
5. COST OF GOODS SOLD
6. PROFIT
It is the cost of goods sold
during an accounting period.
In manufacturing operations,
it includes the following:



• Cost of materials
• Labor and factory
overheads

Profit is a general term for
the excess of revenue over
related cost. When the result
of this computation is
negative, it is referred to as
loss.
8. EXPENSES
Expense is the cost relating
to the operation of an
accounting period, or the
revenue eared during the
period, or the benefit of which
do not extend that period.

9. DEFERRED EXPENDITURE
Deferred expenditure is the
expenditure for which
payment has been made or a
liability incurred but which is
carried forward on the
presumption that it will be a
benefit over a subsequent
period or periods. This is also
referred to as deferred
revenue expenditure.

SUNDRY CREDITOR
SUNDRY DEBTOR
Sundry creditor is the
amount owed by an
enterprise on account of
goods purchased or services
received, or in respect of
contractual obligations. It is
also termed as trade creditor
or account payable.


Sundry debtors are persons
from whom amounts are due
for goods sold or services
rendered, or in respect of
contractual obligations. These
are also termed as debtor,
trade debtor and account
receivable.
CONTINGENT ASSET
CONTINGENT LIABILITY
Contingent asset is an
asset, the existence,
ownership or value of which
may be known or determined
only on the occurrence or
non-occurrence of one or
more uncertain future events.


Contingent liability is an
obligation relating to an
existing condition or situation
which may arise in future
depending on the occurrence
or non-occurrence of one or
more uncertain future events.
Collecting and analyzing data from transactions
and events.
Putting transactions into the general journal.
Posting entries to the general ledger.
Preparing an unadjusted trial balance.
Adjusting entries appropriately.
Preparing an adjusted trial balance.
Organizing the accounts into the financial
statements.
Closing the books.
Preparing a post-closing trial balance to check the
accounts.

The Business Entity Concept:
Entity concept is an assumption that for an accounting
purposes, the business is separate and different from that of
its owners. The entity concept is also known as the concept of
an “Enterprise” and is one of the central concepts in
accounting. The entity concept may be applied to the whole
organization or even to the part of the organization. Thus
according to these concepts the business is treated as separate
unit from that of its owners, creditors, managers, employees
and others.

According to this concepts an enterprises has an unlimited
existence. Thus the concept of Going Concern Continuity can
be expressed as under.
“Unless & until there is evidence to the contrary, an
enterprise must be considered as continuing largely in its
present form and with its present purpose”

The money measurement a concept is an assumption that
any accounting transaction is to be measured in money or
money’s worth. It is only when a transaction is measured that it
can be recorded in the books of an enterprise and the result of
the business is determined.
 Thus the measurement of a transaction also has to be in a
common denomination (medium).
 Money is this common denominations in which transaction
are recorded in the books of account.

The determination of the income of the enterprise cannot be
postponed till the end of the enterprise. Since, according to
Going-concern concept there is no limit for the life of the
enterprises. Hence the economic activities of the business
must be recorded periodically. These period is called as
Accounting period & these Accounting period is normally
called as “Accounting Year” or “Financial Year” or “Fiscal
Year”.

It is, within this Accounting Year, that the income &
expenses (i.e.) costs & revenues are matched with reasonable
accuracy to provide significant results.

According to Historical cost concept, all the transactions are
recorded in the books at cost and not at its market value. Thus
the underlying ideas of this concept are two forms.
a. An asset is recorded at the price paid to acquire it i.e. at
cost and
b. This cost is the basis of all the subsequent treatment of
the assets. e.g. depreciation, stock valuation, etc.,

Matching of Expired cost (i.e., expenses) and revenues for
the period’s determination of income, is one of the most
important concept and procedures of accounting.

This concept follows the accounting period concept i.e. once
an accounting period is determined, within that period, the
revenues and its related costs are matched.
 This concepts is one of the most important concept of
accounting and has received major attention of accountants.
Matching of costs and revenue is the ‘Test reading’ of the
results and the success of the business activity. At the same
time, it is one of the most difficult accounting problems.

This concept is also called the Accrual theory of Accounting or Accrual
Accounting It means a system of recording revenues and expenses of
particular accounting period.
 Whether or not they are receive or paid in cash, at the time of
accounting. It is also known as “Mercantile System of Accounting” as
contrasted to “ Cash system of Accounting. In cash system of accounting,
the revenues are recorded only when received, whether due or not.
Payments i.e. expenses are also recorded irrespective of the fact whether
they
pertain
to
the
period
concerned
or
not.

For matching of costs and revenue under accrual concept, all revenues
related to current year, whenever received, and all costs of the current
year, whenever paid, must be taken into account.


ASSIGNMENT:
What
are the conventions of accountancy
?Explain.
Consistency:
This concept states that once the organisation has decided
on a method, it should use the same method subsequently
unless there is a valid reason for a change of method. If
frequent changes are made it is not possible to carry out
comparisons on an inter-period or interfirm basis. If a change is
necessary it has to be highlighted. e.g. if depreciation is
charged on diminishing balance method, it should be done year
after year.
All significant information should be disclosed. The
disclosure concept states that all significant
information should be disclosed and all insignificant
information should be disregarded. However, there
are no definite rules to separate the two. For
recording purposes also only significant events are
recorded in detail taking into consideration the cost of
detailed record keeping

The accountant should attach importance to material details
and ignore insignificant details. The question what constitutes
a material detail is left to the discretion of the accountant. An
item is material if there is reason to believe that knowledge of
it would influence the decision of the informed investor.
a) Materiality of information b) Materiality of amount
c ) Materiality of procedure.
Financial statements are drawn on a conservatism basis
where better evidence is required of losses. This is necessary as
Management and ownership are in different hands and a cut is
needed on management to show overoptimistic, favourable
performance results.
For example, inventories are valued at the cost or market price
whichever is lower. Revenues are recognised when they are
certain but expenses as soon as they are reasonably possible.
e.g. it encourages the accountant to create provisions for bad
and doubtful debts.
Double-entry accounting is a method of record-keeping that
lets you track just where your money comes from and where it
goes.
 Using double-entry means that money is never gained nor
lost---it is always transferred from somewhere (a source
account) to somewhere else (a destination account). This
transfer is known as a transaction, and each transaction
requires at least two accounts.
 An account is a record for keeping track of what you own,
owe, spend or receive.

For example, we buy machinery for Rs. 300,000.
 It has brought two changes, machinery increases by Rs
300,000 and cash decreases by an equal amount.
 While recording this transaction in the books of accounts,
both the changes must be recorded. In accounting language
these two changes are termed "as a debit change" & "a credit
change".

Thus we see that for every transaction there will be two
entries, one debit entry and another credit entry.
 For each debit there will be a corresponding credit entry of
an equal amount.
 Conversely, for every credit entry there will be a
corresponding debit entry of an equal amount.
 So, the system under which both the changes in a
transaction are recorded together, one change is debited,
while the other change is credited with an equal amount, is
known as double entry system.

The equation that is the foundation of double entry
accounting. The accounting equation displays that all assets
are either financed by borrowing money or paying with the
money of the company’s shareholders. Thus, the accounting
equation is

Assets = Liabilities + Shareholder
Equity
The balance sheet is a complex display of this equation,
showing that the total assets of a company are equal to the
total of liabilities and shareholder equity. Any purchase or sale
has an equal effect on both sides of the equation, or offsetting
effects on the same side of the equation.
 The accounting equation is also written as

Liabilities = Assets – Shareholder Equity
OR
Shareholder Equity = Assets – Liabilities.
Transac
tion
Assets
Numbe
r
Shareholder'
s
Explanation
Equity
Liabilities
1
+
6,000
+
2
+
10,00
+
0
10,00
0
3
−
900 −
900
4
+
1,000 +
5
+
700
6,000 Issuing stocks for cash or other assets
Buying assets by borrowing money (taking a
loan from a bank or simply buying on credit)
Selling assets for cash to pay off liabilities:
both assets and liabilities are reduced
400 +
+
600
Buying assets by paying cash by shareholder's
money (600) and by borrowing money (400)
700 Earning revenues
Transac
tion
Assets
Numbe
r
6
−
Liabilities
9
+
−
−
200
Paying expenses (e.g. rent or professional
fees) or dividends
100 −
100
Recording expenses, but not paying them at
the moment
200
7
8
Shareholder'
s
Explanation
Equity
500 −
0
500
0
Paying a debt that you owe
Receiving cash for sale of an asset: one
0 asset is exchanged for another; no change
in assets or liabilities
Introduction:Accounting is the art of recording, classifying and
summarizing the financial transactions and interpreting the
results thereof. Thus, the accounting cycle involves the
following four major phases:

1. Recording of transactions-- This is done in a book called journal.
2. Classifying the transactions-- This is done in a book called ledger.
3. Summarizing the transactions-- This includes preparation of trial
balance, profit and loss account and balance sheet of the business.
4. Interpreting the results-- This involves computation of various
accounting ratios etc. to know about the liquidity, solvency and
profitability of the business.
Journal
A journal records all daily transactions of a business
in the order of their occurrence. A journal may,
therefore, be defined as a book containing a
chronological record of transactions.

All transactions in the journal are recorded on the
basis of rules of debit and credit. For this purpose,
transactions have been classified into three categories:

i. Transactions relating to persons
ii. Transactions relating to properties and assets
iii. Transactions relating to incomes and expenses
On the basis of above rules, it is necessary to keep the
accounts in respect of the following:

i. Each person with whom it deals (customer, suppliers)
ii. Each property or asset which it owns (building,
machinery etc.)
iii. Each item of income and expense (commission, rent,
salary etc.)
Classification of
Accounts
Personal
Accounts
Real
Accounts
Nominal
Accounts
Personal accounts include the accounts of persons with whom the
business deals. These accounts can be further classified into three
categories:
a. Natural Personal Account
Natural personal account means persons who are creations of God. For
example, Vijay’s a/c, Hary’s a/c etc.
b. Artificial Person Account
Artificial person account includes accounts of corporate bodies or
institutions which are recognized as persons in business dealings. For
example, government, club, limited company, cooperative society etc.
c. Representative Personal Account
Representative personal account is the account which represents a person
or a group of persons. For example, when the rent is due to landlord, an
outstanding rent account represents the account of a landlord to whom the
rent is payable.
Real accounts may be of the following types:
a. Tangible Real Account
Tangible real accounts are those which relate to such things that can be
touched, felt and measured. For example, cash a/c, building a/c, furniture
a/c etc.
b. Intangible Real Account
These accounts represent such things which cannot be touched but,
however, can be measured in terms of money. For example, patent a/c,
goodwill a/c etc.
Nominal accounts are opened in the books of accounts to
simply explain the nature of the transactions. They do not
really exist. For example, salary paid to employee, rent paid to
landlord etc. Nominal accounts mainly include accounts of
expense, losses, income and gains.
Determine the 2 accounts which are involved in
the transaction.
2. Classify the above two accounts under Personal ,
Real and Nominal.
3. Find out the rules of debit and credit for the above
two accounts.
4. Identify which account is to be debited and which
account is to be credited.
1.
Sometimes, there are a number of transactions on the same
date relating to one particular account or of one particular
nature. Such entries can be passed by way of a single journal
entry instead of passing individual journal entries. It may be
recorded in any of the following three ways:
1. A particular account may be debited while several accounts
may be credited.
2. A particular account may be credited while several accounts
may be debited.
3. Several accounts might debited as well as credited.
In the case of a running business, the assets and liabilities
appearing in the pervious year’s balance sheet will have to be
brought forward to the next year. This is done by the means of
a journal entry which is known as “opening entry.” All assets
are debited while all liabilities are credited. The excess of
assets over liabilities is the proprietor’s capital and is credited
to his capital account
Pass the opening entry on 1.1.2001 on the basis of the following
information taken from the business of Mr. Shubham.
1. Cash in hand-- Rs. 20,000
2. Sundry Debtors-- Rs. 60,000
3. Stock in Trade-- Rs. 40,000
4. Plant and Machinery-- Rs. 50,000
5. Land and Building-- Rs. 1,00,000
6. Sundry Creditors-- Rs. 1,00,000

Cash Discount
An incentive that a seller offers to a buyer in return for paying a bill owed
before the scheduled due date. The seller will usually reduce the amount
owed by the buyer by a small percentage or a set dollar amount. If used
properly, cash discounts improve the days-sales-outstanding aspect of a
business's cash conversion cycle.
 For example, a typical cash discount would be if the seller offered a 2%
discount on an invoice due in 30 days if the buyer were to pay within the
first 10 days of receiving the invoice.

Providing a small cash discount would be beneficial for the seller as it would
allow him to have access to the cash sooner. The sooner a seller receives
the cash, the earlier he can put the money back into the business to buy
more supplies and/or grow the company further.
A discount on the list price granted by a
manufacturer or wholesaler to buyers in the same
trade.
 Suppose A buys from B $200 worth of goods. He is
allowed a discount of 10% from the list price. Then he
would have to pay only $180 to B. Suppose the terms
had stipulated that he be allowed a discount of 10%
and 5% off from the list price. This would not give him
a deduction of 15% from the $200

Cash Discount
Trade Discount
Is a reduction granted by supplier from
Is a reduction granted by supplier from the list price of goods or services on
the invoice price in consideration of business consideration re: buying in
immediate or prompt payment
bulk for goods and longer period when
in terms of services
As an incentive in credit management
Allowed to promote the sales
to encourage prompt payment
Not shown in the supplier bill or Shown by way of deduction in the
invoice
invoice itself
Cash discount account is opened in the Trade discount account is not opened
ledger
in the ledger
Allowed on payment of money
Allowed on purchase of goods
It may vary with the quantity of goods
It may vary with the time period within
purchased or amount of purchases
which payment is received
made
 Gave away as charity goods costing Rs. 100 and
cash Rs.50.
Charity Account ……………Dr. 150
To Purchases A/C ………………. 100
To Cash Account …………….. 50
 Goods worth Rs. 4000 were destroyed in a fire.
Insurance company paid 80% of the loss.
Cash Account …………… Dr. 3200
Loss by fire A/C …………….Dr. 800
To Purchases Account …………….. 4000
 Plant purchased for Rs. 7000. Provide Deprecation
@10% P.A. for full year.
Deprecation Account ……………Dr. 700
To Plant Account …………………….. 700
A machine is purchased for rs. 50000.
Transportation expenses Rs. 2000 and Installation
charges Rs. 3000 on this machine.
Machine A/C …………….Dr. 55000
To Cash Account …………………….55000

Sarkar who owed us Rs. 1000 is declared insolvent
and 60 paise in a rupee is received
Cash Account ……………Dr. 600
Bad Debts A/C …………….Dr. 400
To Sarkar Account …………….. 1000
Ledger
LEDGER is the principal book of accounts which
contains various accounts. An account is a summarized
record of similar transactions during an accounting
period relating to a particular person or thing.
Therefore, all the accounts, whether real, nominal or
personal, are collected in the ledger.

What is a ledger?
It is a digest of all accounts utilized by an entity
during an accounting period.


Loose leaf
pages
Computer
printout
Bound
books
Cards
79
Ledger - a group of related accounts kept current in
a systematic manner

 Think of a ledger as a book with
each account.
one page for
Ledger
80
Ledger
Ledger
Cash
Accts. Receivable
Supplies
Accts. Payable
81
Ledger
Ledger
Cash
Customer Accounts
Accts. Receivable
A
B
C
D
Supplies
Accts. Payable
82
Ledger
Ledger
Cash
Customer Accounts
Accts. Receivable
A
B
C
D
Supplies
Creditor Accounts
Accts. Payable
A
B
C
D
83
A simplified version of a ledger account is called the Taccount.

 They allow us to capture the essence of the accounting process
without having to worry about too many details.
 The account is divided into two sides for recording increases and
decreases in the accounts.
Account Title
Left Side
Right Side
84
Debit (dr.) - an entry or balance on the left side of an
account

Credit (cr.) - an entry or balance on the right side of
an account


Remember:
 Debit is always the left side!
 Credit is always the right side!
85
Post from the journal
to the ledger.
86
What is posting?
It is the transfer of information from the journal to
the appropriate accounts in the ledger.


87
POSTING REFERS TO TRANSFERRING THE
INFORMATION IN A JOURNAL ENTRY TO THE
APPROPRIATE LEDGER ACCOUNT
 ENTER DATE
 ENTER AMOUNT IN PROPER DEBIT OR
CREDIT COLUMN
 ENTER JOURNAL SOURCE INFO

88
PROFORMA FOR ACCOUNT
Debit
Date Particulars J.f
Credit
Amt. Date
Particulars J.f
Amt.
89
Account Title
Debit
Credit
LEFT SIDE
90
Account Title
Debit
Credit
RIGHT SIDE
91
Balance - difference between total left-side amounts
and total right-side amounts at any particular time

 Assets have left-side balances.
 Increased by entries to the left side
 Decreased by entries to the right side
 Liabilities and Owners’ Equity have right-side balances.
 Decreased by entries to the left side
 Increased by entries to the right side
92
Journal
Page
Credit
1Particulars
Debit
Date
April 2 Cash
30,000
Garge Capital
30,000
(Received initial
investment from owner)
93
POSTING
Debit
Credit
Date
April 2
Cash Account
Ref. Particulars
Amount
Date Ref
Particulars
Amoun
1 To G. Cap 30,000
Insert the number of the journal page.
94
RECORDING AND POSTING AN
ENTRY
Journal
Page 1
L.F.
Date
Description
Debit
12/1
Prepaid Insurance
Cash
2,400
Credit
2,400
1. Analyze and record the transaction as shown.
2. Post the debit side of the transaction.
3. Post the credit side of the transaction.
95
Recording and Posting an Entry
Journal
Page 1
L.f
Date
Description
12/1
Prepaid Insurance
Cash
Debit
15
Credit
2,400
2,400
Ledger
Prepaid Insurance Account
Dr.
Cr.
Date
Particulars Fol Amt. Date
12/1
.
To Cash 1
Particulars Fol Amt.
.
2400
96
Recording and Posting an Entry
Journal
1
Page 1
Date
Description
L.f.
Debit
12/1
Prepaid Insurance
Cash
15
11
2,400
Credit
2,400
3
4
Ledger
2
Page No.15
Prepaid insurance Account
Dr.
Cr.
Date
Particulars Fol. Amt. Date
12/1
To Cash
1
Particulars Fol. Amt.
2400
97
The totals of the debit side and credit side of an account are
taken to ascertain the difference between the two sides.
 This difference is known as the balance on the account. The
total of the heavier side is entered on the lighter side for
arriving at the balance.
 When the total of the debit side exceeds the total of the
credit side, the balance is said to be in debit, i.e. known debit
balance.
 When the total of the credit side exceeds the total of the
debit side, it means that the account has a credit balance.
 The balancing of the account is necessary to ascertain the
net effect whether debit or credit on the account.

Trial balance is a list of debit and credit balances extracted
from the ledger on a particular date. Since for every debit
entry there is a corresponding credit entry of the equivalent
amount, the total of the debit and credit balances should
agree in equal amount.
 A trial balance essentially proves the arithmetical accuracy
of the entries passed in the books of account and is derived
from ledger where all accounts find a place.
 Trial balance is prepared after striking the balance of
various accounts in the ledger.

1. It forms the very basis on which final accounts are prepared.
2. It helps in knowing the balance on any particular account in
the ledger.
3. It is a test of arithmetical accuracy.
Note:A trial balance is not a conclusive proof of the
absolute accuracy of the account. It does not indicate the
absence of an error. So, a non-tailed trial balance indicates the
presence of book keeping error.

The purposes of the trial balance:
 To help check on accuracy of posting by
proving whether the total debits equal the
total credits
 To establish a convenient summary of
balances in all accounts for the preparation
of formal
financial statements
101
• Wrong posting of entries, e.g., a debit entry of Rs. 500 for
purchase of furniture wrongly posted as Rs. 50 in the account
• Omission of posting, e.g., when a debit entry of Rs. 500 for
purchase of furniture has not been posted at all
• Duplication of posting, e.g., when a debit entry of Rs. 500 for
purchase of furniture has been posted twice to the account
• Wrong side of posting, e.g., when debit entry is posted on
the credit side or credit entry is posted on the debit side. That
is, when debit entry of Rs. 500 is posted on the credit side and
vice-versa
• Errors in casting the totals of debit or credit side of the trial
balance
• Wrong transfer of balances to the trial balance
• Omission of entering the balance of account in the trial
balance
• Balance of cash book omitted to be recorded in the trial
balance
• Wrong balancing of account
(a) Errors of omission to record any transaction.
(b) Posting of wrong amount to both debit and credit side of the account.
(c) Error made in the posting of debit or credit entry is compensated by an
identical error of equal amount. These errors are known as errors of
compensation.
(d) Errors made in posting a transaction on the correct side of wrong
account.
(e) Erroneously recording a transaction twice. These are known as errors
of duplication.
(f) Errors of principle when the accounting principle is disregarded. For
example, a capital item treated as revenue item and vice versa. That is,
purchase of furniture posted to purchase a/c.
The trial balance is usually prepared with the
balance sheet accounts first, followed by the
income statement accounts.


An example of a trial balance:
Account
Number
100
130
202
300
Account Title
Cash
Merchandise inventory
Note payable
Paid-in capital
(Rs)
Debit
Credit
3,50,000
3,50,000
150,000
150,000
100,000
100,000
400,000
400,000
500,000
500,000
===================
==================
106
Note that a trial balance may balance even when
errors were made in recording or posting.

 A transaction may be recorded as different amounts in two
different accounts.
 A transaction may be recorded in a wrong account.
In both situations, the total debits will still equal
total credits on the trial balance.

Dr. = Cr.
107
Correcting Errors
Three Types of Errors
Journal Entry
1. incorrect
Ledger Posting
not posted
108
Correcting Errors
Three Types of Errors
Journal Entry
1. incorrect
2. correct
Ledger Posting
not posted
incorrectly posted
109
Correcting Errors
Three Types of Errors
Journal Entry
1. incorrect
2. correct
incorrect
Ledger Posting
not posted
incorrectly posted
110




What if it doesn’t balance ?
Is the addition correct?
Are all accounts listed?
Are the balances listed correctly?
DEBITS
CREDITS
111
Divide the difference by two.
Is there a debit/credit balance for this amount
posted in the wrong column?
 Check journal postings.
 Review accounts for reasonableness.


112
CAPITAL EXPENDITURE
1. Capital expenditure is that expenditure the benefits of which are not fully
consumed in a year but spread over several years.
2. It is the expenditure which results in the purchase or acquisition of asset
or property.
3. It is the expenditure incurred in connection with the purchase of asset.
4. It is the expenditure incurred to bring an old asset into working
condition.
5. It is the expenditure incurred for extending or improving an existing asset
to increase its productivity or to increase the earning capacity of business or
to decrease working expenditure.
1. Revenue expenditure is the expenditure which benefits in
the current accounting year. It is not carried forward to the
next year or years.
2. It is the expenditure which is incurred in the normal course
of business to run the business and to maintain the fixed assets
of business.
3. It is the expenditure which is incurred on purchase of goods
meant for resale or to purchase materials which will be used to
convert them into final product.
Therefore, revenue expenditure is a recurring expenditure made to
maintain the business. The amount spent is generally small and the benefit is
for a short period which is not more than a year. All revenue expenditure
are charged to trading and profit and loss account.
Deferred revenue expenditure is the expenditure which is
originally revenue in nature but the amount spent is so large
that the benefit is received for not a year but for many years.
 A proportionate amount is charged to profit and loss
account of each year and balance is carried forward to
subsequent years as deferred revenue expenditure.
 It is shown as an asset in the balance sheet, e.g., heavy
expenditure incurred on advertisements.

Capital receipts are the receipts which are not
received in the ordinary course of business. These are
non-recurring receipts.
 Money obtained from the sale of fixed assets or
investments, issue of shares or debentures, loans
taken are some of the examples of capital receipts.
 Capital receipts are shown as liability reduced from
assets appearing in the balance sheet.

Revenue receipts are receipts obtained in the
normal course of business. It is a receipt against
supply of goods or services.
 The money obtained from sales, interest, dividend,
transfer fees etc. are examples of revenue receipts.
Revenue receipts are credited to profit and loss
account.

Those profits which are not earned during the regular course
of business and which are not earned on account of the day-today trading activities of the business are capital profits. For
example, profit on sale of asset and premium received on issue
of shares.
 These types of profits are normally not taken to profit and
loss account but are shown in the liabilities side of the balance
sheet.

The losses which are not suffered during the regular
course of business are called capital losses. For
example, discount on issue of shares.
The financial statements are a picture
of the company in financial terms.
Each financial statement relates to a specific
date or covers a particular period.
120
Question
Answer
1. How well did the
company perform
(or operate) during
the period?
Revenues
– Direct Expenses
Gross income (Gross loss)
1. How well did the
company perform
(or operate) during
the period?
Gross Profit
– Indirect Expenses
Net income (Net loss)
121
Financial
Statement
Trading
Account
Profit and
Loss
Account
Question
3. What is the company’s
financial position at the
end of the period?
4. How much cash did
the company generate
and spend during
the period?
122
Answer
Assets
= Liabilities
+ Owners’ equity
Operating cash flows
± Investing cash flows
± Financing cash flows
Increase or decrease in cash
Financial
Statement
Balance
sheet
Statement
of
cash
flows
The income statement,
reports the company’s revenues,
expenses, and net income
or net loss for the period.
123
The income statement is a financial
tool that provides information about
a company’s past performance.
124
Revenues
–
125
Expenses
=
Net income
(or Net loss)
Sales revenues
Selling and
– Cost of goods sold– administrative =
Gross profit
expenses
Operating
income
Add: Other revenues and gains
Less: Other expenses and losses
126
Income Statement
Revenue
- the proceeds that come from sales to customers
Cost of Goods Sold - an expense that reflects the cost of the product or good
that generates revenue. .
Gross Margin
- also called gross profit, this is revenue minus
COGS
Operating Expenses
- any expense that doesn't fit under COGS
such as administration and marketing expenses.
Net Income before Interest and Tax - net income before taking interest
and income tax expenses into account.
Interest Expense
outstanding debt.
- the payments made on the company's
Income Tax Expense
- the amount payable to government.
Net Income
revenue.
127
- the final profit after deducting all expenses from
The Income Statement can be divided
into:
• Trading Account
• Profit and Loss Account
128
Revenues are inflows or other
enhancements of assets to an entity.
They result from delivering or
producing goods, rendering services,
or other activities that constitute the
entity’s major or central operations.
129
Expenses are outflows or
other using up of assets.
They result from delivering or
producing goods, rendering services,
or other activities that constitute the
entity’s major or central operations.
130
 Gross profit (gross margin) - excess of sales revenue over the
cost of inventory that was sold
 Operating expenses - a group of recurring expenses that pertain
to a firm’s routine operations
 Operating income (operating profit) - gross profit less all
operating expenses
 Other revenues and expenses - items not directly related to the
main operations of a firm
131
Net income - the remainder after all expenses
(including income taxes) have been deducted from
revenue

 Often seen as the “bottom line”

Net loss - the excess of expenses over revenues
132
Introduction
After the agreement of trial balance, a trader closes
ledger accounts with a view to ascertain the following
aspects:
• Gross profit
• Net profit
• Financial position of the firm
The goods account is split up and separate accounts are opened as
follows:
• Opening stock account, i.e. stock at commencement
• Purchase account including both cash and credit purchases
• Sales account including both cash and credit sales
• Returns inwards account, i.e. total goods returned by customers
• Returns outwards account, i.e. total goods returned to vendors
• Closing stock account, i.e. stock of goods at the end
These separate accounts, in total, are ultimately transferred to a
common heading called trading account.
Net Sales =Cash Sales+Credit
sales-Sales Return
Cost Of Goods Sold=Opening
Stock +Net Purchases-closing
stock(stock at the end)+Direct
Expenses
Net Purchases=Cash
Purchases+Credit PurchasesPurchases Return
Gross Profit=Net Sales RevenueCost Of Goods Sold
The balances of accounts of all related items have to
be transferred to the trading account by way of
passing entries. The entries needed for such transfers
are termed as closing entries.
 The closing entries are as follows:


Trading A/c
Dr.
To opening stock
To Purchases A/c
To Sales Return A/c
To Wages A/c
To Direct Expenses A/c
Sales A/c
Dr.
Purchases Return A/c Dr.
To Trading A/c
(a)
For gross Profit:
Trading A/c
Dr.
To profit and Loss A/c
(b) For Gross Loss
Profit and Loss A/c Dr.
To Trading A/c
In order to find out the gross profit or gross loss of a
business, a trading account is prepared.
 This account gives the overall profit of the business
relating to an accounting period which is subject to
deduction of general administrative, selling and other
expenses.
 Gross profit is the difference between sale
proceeds of a particular period and the cost of the
goods actually sold during that period.

Profit and loss account is prepared with a view to ascertain
the profit or loss on account of business activity during an
accounting period.
 Profit and loss account is also an account like other accounts
in the ledger which discloses the net effect in the form of profit
or loss resulting from settling off the expenses incurred against
the revenue earned during the accounting period.
 The difference between total revenue and total expenses
represents net income or net loss according to whether the
difference is positive or negative.
 In this regard, it is pertinent to note that all the expenses
incurred for the period are to be debited to this account,
whether paid or not. Likewise, all revenue earned, whether
received or not, are to be credited to this account.

The balance of a trading account showing gross profit or gross loss
becomes the opening transfer entry of this account on the credit or debit
side respectively.
 All the revenue expenses appear on the debit side including those
expenses which do not find a place in the trading account.
 The losses on sale of capital asset or any abnormal loss also appear on
the debit side. The credit side of the account shows the revenue earned
including the non-trading income like interest on bank deposit or
securities, dividend on shares, rent of let-out property, profit arising from
sale of fixed assets etc. after transfer of all the nominal accounts from the
trial balance to the profit and loss account.
 The net result of the profit and loss account is ascertained by balancing
it. If the credit side is more than the debit side, it indicates net profit for
the period.
 Conversely, if the debit side is more than the credit side, it indicates net
loss for the period.

The balance sheet is the financial
tool that focuses on the present
condition of a business.
145
The American Institute of Certified Public Accountants
defines balance sheet as “a tabular statement of summary of
balances (debits and credits) carried forward after an actual
and constructive closing of books of account and kept according
to the principles of accounting.”

The balance sheet is one of the important statements
depicting the financial strength of the company. On one hand,
it shows the properties which were utilized and on the other,
the sources of those properties.
 The balance sheet shows all the assets owned by the
company and all the liabilities and claims it owes to owners and
outsiders.
 The balance sheet is prepared on a particular date. The right
hand side shows properties and assets. Usually, there is no
particular sequence for showing various assets and liabilities.

The Balance sheet shows the financial position of a
company at a particular point in time.

 The balance sheet is also referred to as the statement of
financial position or the statement of financial condition.
The left side lists assets – the right side lists liabilities
and owners’ equity

148
Probable future economic benefits
obtained or controlled by a
particular entity as a result
of past transactions events.
149
Probable future sacrifices of economic
benefits arising from present obligations
of a particular entity to transfer assets
or provide services to other entities
in the future as a result of past
transactions or events.
150
The residual interest in the assets
of an entity that remains after
deducting its liabilities.
Investment
by owners
151
Earned
equity

Balance sheet formats:
 Report format - a classified balance sheet with assets at the top
and liabilities and equity below
 Account format - a classified balance sheet with assets at the
left and liabilities and equity at the right
Regardless of format, balance sheets always contain
the same basic information.

152

The balance sheet is affected by every
transaction that an entity encounters.
Each transaction has counterbalancing
entries that
keep total assets equal to
total liabilities and
owners’ equity.

153
RESOURCES
AVAILABLE FOR USE
BY THE FIRM (ENTITY)
 ASSETS PROBABLE FUTURE
ECONOMIC BENEFITS

HOW RESOURCES
ARE FINANCED
 LIABILITIES - DEBT
OWED TO OTHERS
 OWNERS’ EQUITY INVESTMENT BY
OWNERS

 DIRECT
 INDIRECT
154
1.
Share Capital
Share capital is the first item on the liabilities side of a
balance sheet. Authorized and issued capital is shown
giving the number of shares and their amount. The number
of shares for which public has applied (subscribed capital)
are mentioned along with the type of capital, i.e.
preference share capital and equity share capital. If the
capital is issued for other than cash, the amount of such
capital is mentioned.
SECURED LOANS
All those loans against which securities are given are shown under this
category. Debentures are shown under this heading. Loans and advances
from bank, subsidiary companies etc. should be shown separately and the
nature of securities should also be mentioned.
UNSECURED LOANS
These are the loans and advances against which the company has not
given any security. The items included here are deposits, loans and
advances from subsidiary companies and loans and advances from other
sources. Short-term loans from banks and other sources are also shown in
this category. Short-term loans include those which are due for not more
than one year on the balance sheet.
(A) CURRENT LIABILITIES
INCLUDE THE FOLLOWING:
• Acceptances
• Sundry creditors
• Subsidiary companies
• Advance payments and unexpired
discounts
• Unclaimed dividends
• Other liabilities, if any
• Interest accrued but not paid on
loans
(B) FOLLOWING ITEMS ARE
INCLUDED UNDER PROVISIONS:
• Provision for taxation
• Proposed dividends
• Provision for contingencies
• Provision for provident fund
scheme
• Provision for insurance, pension
and similar staff benefits schemes
• Other provisions
1. FIXED ASSETS
Fixed assets are those which are
purchased for use over a long
period. These assets are meant to
increase production capacity of the
business.
 They are not acquired for sale but
are used for a considerable period of
time.
 The balance sheet is prepared to
show the financial position of the
concern. These assets should be
shown in such a way that balance
sheet depicts true financial position
of the business.

2. INVESTMENTS
Investments are shown by giving
their nature and mode of valuation.
Investments under various subheads such as investments in
government or trust securities, in
shares, debentures and bonds, and
in immovable properties are given
separately in the inner column of the
balance sheet.

3. CURRENT ASSETS
4. MISCELLANEOUS
EXPENDITURE
Deferred expenditure is shown
under this heading. Miscellaneous
expenditure are the expenses which
are not debited fully to the profit
and loss account of the year in which
they have been incurred. These
expenses are spread over a number
of years and unwritten balance is
shown in the balance sheet. The
items under this heading are
preliminary expenses, discount
allowed on issue of shares or
debentures, interest paid out of
capital during construction

Current assets are such assets as
in the ordinary and natural course of
business move onward through the
various processes of production,
distribution and payment of goods,
until they become cash or its
equivalent by which debts may be
readily and immediately paid.


Elements of the balance sheet:
 Assets - resources of the firm that are expected to
increase or cause future cash flows (everything the
firm owns)
 Liabilities - obligations of the firm to outsiders or claims
against its assets by outsiders (debts of the firm)
 Owners’ Equity - the residual interest in, or remaining
claims against, the firm’s assets after deducting
liabilities (rights of the owners)
163
Current assets
Long-term assets
Current liabilities
Long-term liabilities
164
XYZ Ltd.
Trial Balance
November 30, 2002
Cash
Purchases
Land
Accounts Payable
Amit, Capital
Amit, Drawing
Fees Earned
Wages Expense
Rent Expense
Commission
Supplies Expense
Miscellaneous Expense
165
5,900
550
20,000
400
25,000
2,000
7,500
2,125
800
450
800
275
32,900
32,900
XYZ Ltd.
Trial Balance
November 30, 2002
Balance
Sheet
166
Cash
Purchases
Land
Accounts Payable
Amit, Capital
Amit, Drawing
Fees Earned
Wages Expense
Rent Expense
Commission
Supplies Expense
Miscellaneous Expense
5,900
550
20,000
400
25,000
2,000
7,500
2,125
800
450
800
275
32,900
32,900
XYZ Ltd.
Trial Balance
November 30, 2002
Income
Statement
167
Cash
Purchases
Land
Accounts Payable
Amit, Capital
Amit, Drawing
Fees Earned
Wages Expense
Rent Expense
Commission
Supplies Expense
Miscellaneous Expense
5,900
550
20,000
400
25,000
2,000
7,500
2,125
800
450
800
275
32,900
32,900
XYZ Ltd.
Balance Sheet
168
1.
11
12
14
15
17
18
Assets
Cash
Accounts Receivable
purchases
Prepaid Insurance
Land
Office Equipment
2.
21
23
Liabilities
Accounts Payable
Unearned Rent
3.
31
32
Owner’s Equity
Amit, Capital
Amit, Drawing
Income Statement
4.
41
5.
51
52
54
55
59
Revenue
Sales
Expenses
Wages Expense
Rent Expense
Commission
Supplies Expense
Miscellaneous Expense
Original evidence
records
Source
documents
Accounting
Financial
records
Statements
Journals
Ledger
Trial
Balance
Closing
Entries
169
Profit and Loss
Statement
Balance Sheet
Statement of
cash flows
The balance sheet is generally divided into parts, i.e. assets, liabilities and
capital. It is usually prepared in the horizontal form. The assets are shown
on the right hand side and capital and liabilities on the left hand side.
 The order of assets and liabilities is either on liquidity basis or on
permanency basis. When balance sheet is prepared on liquidity basis, large
liquid assets like cash in hand, cast at bank, investments etc. are shown first
and small liquid assets later. On liabilities side, the liabilities to be paid in the
short period are shown first, long-term liabilities next and capital in the last.
 The liquidity form is suitable for banking and other financial companies.
When balance sheet prepared on permanency basis, on assets side, fixed
assets are shown first and liquid assets later. On liabilities side, the capital is
shown first, long-term liabilities next, and short-term and current liabilities
in the last.

Thank
You